[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
EXAMINING DE-RISKING AND ITS EFFECT
ON ACCESS TO FINANCIAL SERVICES
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
AND CONSUMER CREDIT
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTEENTH CONGRESS
SECOND SESSION
__________
FEBRUARY 15, 2018
__________
Printed for the use of the Committee on Financial Services
Serial No. 115-75
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
_________
U.S. GOVERNMENT PUBLISHING OFFICE
31-348 PDF WASHINGTON : 2018
HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
PATRICK T. McHENRY, North Carolina, MAXINE WATERS, California, Ranking
Vice Chairman Member
PETER T. KING, New York CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma BRAD SHERMAN, California
STEVAN PEARCE, New Mexico GREGORY W. MEEKS, New York
BILL POSEY, Florida MICHAEL E. CAPUANO, Massachusetts
BLAINE LUETKEMEYER, Missouri WM. LACY CLAY, Missouri
BILL HUIZENGA, Michigan STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin DAVID SCOTT, Georgia
STEVE STIVERS, Ohio AL GREEN, Texas
RANDY HULTGREN, Illinois EMANUEL CLEAVER, Missouri
DENNIS A. ROSS, Florida GWEN MOORE, Wisconsin
ROBERT PITTENGER, North Carolina KEITH ELLISON, Minnesota
ANN WAGNER, Missouri ED PERLMUTTER, Colorado
ANDY BARR, Kentucky JAMES A. HIMES, Connecticut
KEITH J. ROTHFUS, Pennsylvania BILL FOSTER, Illinois
LUKE MESSER, Indiana DANIEL T. KILDEE, Michigan
SCOTT TIPTON, Colorado JOHN K. DELANEY, Maryland
ROGER WILLIAMS, Texas KYRSTEN SINEMA, Arizona
BRUCE POLIQUIN, Maine JOYCE BEATTY, Ohio
MIA LOVE, Utah DENNY HECK, Washington
FRENCH HILL, Arkansas JUAN VARGAS, California
TOM EMMER, Minnesota JOSH GOTTHEIMER, New Jersey
LEE M. ZELDIN, New York VICENTE GONZALEZ, Texas
DAVID A. TROTT, Michigan CHARLIE CRIST, Florida
BARRY LOUDERMILK, Georgia RUBEN KIHUEN, Nevada
ALEXANDER X. MOONEY, West Virginia
THOMAS MacARTHUR, New Jersey
WARREN DAVIDSON, Ohio
TED BUDD, North Carolina
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York
TREY HOLLINGSWORTH, Indiana
Shannon McGahn, Staff Director
Subcommittee on Financial Institutions and Consumer Credit
BLAINE LUETKEMEYER, Missouri, Chairman
KEITH J. ROTHFUS, Pennsylvania, WM. LACY CLAY, Missouri, Ranking
Vice Chairman Member
EDWARD R. ROYCE, California CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma GREGORY W. MEEKS, New York
BILL POSEY, Florida DAVID SCOTT, Georgia
DENNIS A. ROSS, Florida NYDIA M. VELAZQUEZ, New York
ROBERT PITTENGER, North Carolina AL GREEN, Texas
ANDY BARR, Kentucky KEITH ELLISON, Minnesota
SCOTT TIPTON, Colorado MICHAEL E. CAPUANO, Massachusetts
ROGER WILLIAMS, Texas DENNY HECK, Washington
MIA LOVE, Utah GWEN MOORE, Wisconsin
DAVID A. TROTT, Michigan CHARLIE CRIST, Florida
BARRY LOUDERMILK, Georgia
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York
C O N T E N T S
----------
Page
Hearing held on:
February 15, 2018............................................ 1
Appendix:
February 15, 2018............................................ 39
WITNESSES
Thursday, February 15, 2018
Baxter, Tim, President, SwypCo ATM Solutions, on behalf of the
National ATM Council........................................... 5
Orozco, Manuel, Director, Migration, Remittances, and
Development, Inter-American Dialogue........................... 8
Oxman, Jason D., Chief Executive Officer, The Electronic
Transactions Association....................................... 7
Schneider, Bryan A., Secretary, Illinois Department of Financial
& Professional Regulation, on behalf of the Conference of State
Bank Supervisors............................................... 4
APPENDIX
Prepared statements:
Baxter, Tim.................................................. 40
Orozco, Manuel............................................... 68
Oxman, Jason D............................................... 74
Schneider, Bryan A........................................... 85
Additional Material Submitted for the Record
Ellison, Hon. Keith:
Written statement for the record from Charity & Security
Network.................................................... 98
Written statement for the record from Global Center on
Cooperative Security....................................... 103
Written statement for the record from John Byrne, Esq.,
Condor Consulting, LLC..................................... 106
Scott, Hon. David:
Written statement for the record from National Pawnbrokers
Association................................................ 111
EXAMINING DE-RISKING AND ITS EFFECT
ON ACCESS TO FINANCIAL SERVICES
----------
Thursday, February 15, 2018
U.S. House of Representatives,
Subcommittee on Financial
Institutions and Consumer Credit,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 9:32 a.m., in
room 2128, Rayburn House Office Building, Hon. Blaine
Luetkemeyer [chairman of the subcommittee] presiding.
Present: Representatives Luetkemeyer, Rothfus, Posey, Ross,
Pittenger, Barr, Tipton, Williams, Trott, Loudermilk, Kustoff,
Tenney, Clay, Maloney, Scott, Green, Ellison, and Crist.
Also present: Representative Hensarling.
Chairman Luetkemeyer. The committee will come to order.
Without objection, the Chair is authorized to declare a recess
of the committee at any time. This hearing is entitled,
``Examining De-risking and its Effect on Access to Financial
Services.''
Before we begin today, I would like to thank the witnesses
for appearing. We appreciate your participation and look
forward to the discussion.
I know that this is the second hearing in 2 days for this
committee, which is a little unusual, but appreciate all the
participation, and we will get a few more members here shortly.
It is a little early. Lot of other activities going on this
morning, so bear with us and thank the committee members for
their participation.
I now recognize myself for 5 minutes for the purpose of
delivering an opening statement.
In 2012, a group of industry leaders came to me to tell me
that they had lost access to financial services overnight.
Their long-standing bank accounts were closed. These men and
women didn't bank within the same institution. They weren't
from the same part of the country. And there was no evidence
they were participating in an illegal activity.
However, they were all part of the same business, a
business that was unsavory to Washington bureaucrats. This was
the beginning of Operation Chokepoint, the joint initiative
between the Department of Justice (DOJ) and the FDIC (Federal
Deposit Insurance Corporation) to choke off certain businesses
from the financial services they needed to survive, not based
on wrongdoing but on political motivation.
Operation Chokepoint has a chilling effect on financial
institutions and their customers. What started as an effort to
push non-deposit lenders out of the banking system has
metastasized. This larger, more aggressive trend of de-risking
has spread to other regulatory agencies, banks, institutions,
and industries.
Like many of my colleagues, I have heard too many people
who have lost access to financial services. Accounts have been
terminated for a money servicing business in Cincinnati. It was
a payday lender from St. Louis; an ATM operator from the
suburbs of Phoenix; amusement and gaming operators in Oregon
and California.
The trend has hit pawnbrokers in Dallas, San Diego,
Oklahoma City, from Rhode Island to Colorado and nearly every
State in between.
Across the financial spectrum this dangerous trend of de-
risking is alive and well. Most likely it is a result of
increased exam pressure and compliance costs. The banks and
credit unions are continuing to close accounts of long standing
customers, in some cases even disclosing in writing that the
regulatory pressure was simply too intense and the hurdles too
insurmountable.
These issues beg some very serious questions. Where do
these businesses go when pushed out of the U.S. financial
system? What are the implications for law enforcement? Does
this attempt to de-risk actually create more significant risks
for law enforcement, financial stability, and consumer
protection?
The reality is that removing risk from the system actually
creates a problematic environment where entire industries that
were once part of a highly regulated system are pushed into the
shadows.
This is a conversation we have had in the BSA/AML (Bank
Secrecy Act/anti-money laundering) space. We need to ensure
that there are processes and procedures in place so that we can
guard against fraud and criminal activity in a meaningful way
without imposing unnecessary and unproductive burdens on
institutions.
This is not a partisan issue and one that should sound
alarms for all of my colleagues. Working together, this
committee secured passage of H.R. 2706, my Financial
Institutions Consumer Protection Act, which will help curb de-
risking by requiring Federal banking agencies to establish a
transparent process by which account termination requests and
orders must be made.
However, we must continue to shine light on this issue so
that we understand why de-risking is continuing and
implications it has on our accounting, both at home and abroad.
We have an excellent slate of witnesses today. We thank you
for appearing. I look forward to your testimony.
The Chair now recognizes the gentleman from Georgia for the
purpose of delivering an opening statement. Mr. Scott?
Mr. Scott. Thank you. Yes, thank you very much, Mr.
Chairman. This is indeed, as you have said, a very important
hearing. And a part of what we must do is what I refer to as we
have to shine a light out of the darkness here.
You can overregulate and when you overregulate there is a
trickle-down effect and unintended consequences, and you wind
up hurting the very people you are trying to help.
And nowhere is that more significant in what you are trying
to do with our chokepoint legislation, H.R. 2706, which I
commend you on working with. I am proud to work with you on
that so that we can.
And then you have the other, the Bank Secrecy Act which
affects our financial system is very intricate. It is complex.
It is complicated, and it is that way because we have a very
diverse clientele out there. You have people on the up end of
the income scale making millions of dollars that we have to
work with on Wall Street investment.
But then you have that other person. You have 50 million,
60 million unbanked and underbanked people who if they have an
emergency surgery they need help. All they have as a lifeline
is that pawnbroker.
And now we have as a result of overregulation many
traditional banks that have had a long working, good history
with pawnbrokers, all of a sudden we have our great banks
closing their accounts because of this overregulation.
Mr. Chairman, I think this is a great hearing. I look
forward to it. Welcome all of the distinguished panelists we
have, and thank you very much.
Chairman Luetkemeyer. Thank the gentleman from Georgia for
his comments and his hard work on our issues to this point as
well.
Today we welcome the testimony of our witnesses, Secretary
Bryan Schneider, Illinois Department of Financial and
Professional Regulation on behalf of the Conference of State
Bank Supervisors; Mr. Tim Baxter, President, SwypCo ATM
Solutions on behalf of the National ATM Council; Dr.--or Mr.
Jason Oxman--I almost gave you a promotion there, Jason--Chief
Executive Officer, Electronic Transactions Association. You
looked like a doctor with your bow tie this morning, so--Dr.
Manuel Orozco, I hope I got that right--Director, Migration,
Remittances, and Development, Inter-American Dialogue.
Thankfully you all have easier names to pronounce than the
group we had yesterday, because I think every single one of
them was like Luetkemeyer. It was different to pronounce. But
hopefully we will be able to be respectful with your names
today.
I thank each of you for being here. You will be recognized
for 5 minutes to give an oral presentation of your testimony.
Without objection, each of your written statements will be made
part of the record.
For those of you who haven't been here before, the lighting
system is green go. When the light turns yellow it is you have
about a minute to wrap up. And turns red, why, I will gavel you
out here.
Also, if you would pull--those microphones do come forward.
A lot of times--I see Mr. Orozco there is pretty far from him.
You can string it out or you can pull that box to you if it
makes it more comfortable to you.
Our sound system here is not that great. The acoustics are
not the greatest, so we want to make sure everybody has a
chance to be heard. And our folks who are taking the testimony
today need to be able to hear you clearly. We thank you for
that indulgence.
And with that, Mr. Schneider, you are recognized for 5
minutes.
STATEMENT OF BRYAN SCHNEIDER
Mr. Schneider. Good morning, Chairman Luetkemeyer, Ranking
Member Clay and members of the subcommittee. My name is Bryan
Schneider. I am the Secretary of the Illinois Department of
Financial and Professional Regulation. It is my pleasure to
testify today on behalf of the Conference of State Bank
Supervisors.
I want to thank Chairman Luetkemeyer and the subcommittee
for its work over many years on this important issue. State
regulators are locally focused and locally accountable.
We have seen the consequences of de-risking for our banks,
their customers, and the communities they serve.
State regulators charter and supervise 78 percent of the
Nation's banks. We also are the primary regulators of more than
23,000 non-depository financial services providers, including
money service businesses, commonly known as MSBs.
Data collected through our nationwide multistate licensing
system, NMLS, shows that MSBs are on pace to handle over $1
trillion in transactions during 2017. As a banking regulator, I
expect State-chartered banks in Illinois to understand the
risks of their customers and to effectively manage those risks.
I do not expect nor require my supervised banks to reject
entire categories of legally operating businesses. As a
regulator of a broad range of MSBs, I see firsthand the
challenges these companies can face in getting and maintaining
banking relationships.
Indiscriminate de-risking, a practice that eliminates MSB
bank accounts, not only weakens access to financial services,
but actually makes enforcing the Bank Secrecy Act more
difficult. It also becomes a public safety issue.
I am aware of de-risking both in Illinois and across the
Nation. I hear stories about how legitimate MSBs physically
carry large amounts of cash because they have no other means of
money transmission, a dangerous practice.
Just last year, an MSB in Seattle was robbed of nearly
$130,000 in cash that it was keeping in an in-store safe
instead of a bank account. Two years ago my own agency
identified an MSB whose agent transported $686,000 in cash to
Jordan after its credit union accounts were closed.
Today I want to emphasize the commitments State regulators
have to responsible and efficient MSB oversight. I will also
share some of the solutions we have developed to give
regulators, industry, and consumers greater visibility into the
existing, emerging, and evolving risks for MSBs.
Virtually all States have a comprehensive and rigorous
licensing, reporting, and examination process for MSBs. If an
MSB is found to be out of compliance or in violation of these
requirements, it is subject to enforcement action. And in
extreme cases, this can include revoking its license.
Enforcement actions, as well as licensing information, are
available to the public on our consumer-facing website. And
indeed, there were nearly 3 million visitors to the site last
year.
This week, CSBS (Conference of State Bank Supervisors)
released a self-assessment tool for MSBs intended to reduce
uncertainty surrounding BSA/AML compliance, increase
transparency, and address de-risking. CSBS launched a similar
tool for banks early last year.
In October, the CSBS task force that I chair created a
FinTech industry advisory panel made up of companies from the
payments and money transmission, lending, and community banking
sectors. The panel solicits industry input to help States
modernize regulatory regimes, identify friction points in
licensing and multi-State regulation, and discuss solutions.
Right now, CSBS is building a new technology platform
designed to transform State examinations, helping States
respond to increasingly borderless financial markets. State
regulators also are working together to find more efficient
ways to regulate MSBs.
Just last week, several States, including my own of
Illinois, announced a multi-State agreement that standardizes
the licensing process for MSBs. Under this agreement, if one
State reviews key elements of State licensing for a money
transmitter, including BSA compliance, then other participating
States will accept that work.
This effort to streamline the MSB licensing process is a
great example of State-driven initiative, innovation, and
experimentation.
Thank you for the opportunity to testify today, and I look
forward to answering your questions.
[The prepared statement of Mr. Schneider can be found on
page 85 of the Appendix]
Chairman Luetkemeyer. Thank you, Mr. Schneider. He yields
back his time.
Mr. Baxter, you are recognized for 5 minutes.
STATEMENT OF TIM BAXTER
Mr. Baxter. Well, Chairman Luetkemeyer and Ranking Member
Clay and members of the subcommittee, thank you for the
opportunity to be here to testify before you today.
My name is Tim Baxter. I am President and Co-owner of
SwypCo, LLC, an ATM solutions company that operates ATMs, as
well as provides ATM services to other operators and owners. I
am also a former U.S. Marine who enlisted in 1970.
I am testifying before you today on behalf of the National
ATM Council, an association of individuals of businesses
engaged in the ownership, operation of servicing independent
ATMs in the United States. Of the approximately 470 ATMs
located throughout the United States, 60 percent of them are
independently owned.
Since the launch of Federal law enforcement regulatory
agencies of Operation Chokepoint in 2013, Chokepoint continues
to be a growing threat to the continued existence of America's
independent industry, an industry that began in 1996.
An alarming number of banks in the name of de-risking their
institutions because of Chokepoint have closed the bank
accounts of independent ATM operators throughout the United
States. Hundreds of small businesses have been told by their
banks without any prior notice or any explanation that their
accounts are closed.
These account closures began to occur when Operation
Chokepoint was announced and continued through 2016. In 2017,
the accelerator of Operation Chokepoint was placed to the floor
and we saw more bank account closures than any other prior
years before.
There are two things that are essential that I believe this
subcommittee should understand. First, there is no logical
reason given any way that our industry is structured that we
operate for banks, with banks, and we are heavily regulated
through our sponsoring banks.
Second, no independent ATM provider can remain in business
without a bank account. Every ISO (independent sales
organization), an independent ATM provider, must be sponsored
by a sponsoring bank before getting into business.
Anyone who wanted to become an owner is heavily vetted
through our due diligence process, and if they survive that
process then thereafter the ISOs are required to submit
quarterly reports to the sponsoring bank for each terminal, as
well as undergo annual reviews and audits by the sponsoring
bank.
All ATM providers must operate in accordance with the
detailed network rules associated with our industry. When it
became clear, despite detailed safeguards, that treating ATM
operators as high risk was considered appropriate by banks and
regulators, NAC (National ATM Council) set out to develop a set
of operational guidelines for independent operators in the best
interest of our industry.
NAC modeled our guidelines based upon the provisions of the
FFIEC's (Federal Financial Institutions Examination Council's)
BSA/AML examination manual published by the FFIEC on their
website.
An independent ATM industry plays a vital role in the
Nation's economy, for many of our terminals are located in
underbanked, low-income neighborhoods in very rural areas where
there are few banks and fewer bank-owned ATMs.
Continued account closures will force even more independent
operators out of business and would choke out convenience to
cash for millions of Americans.
The consequences of disappearance of independent ATMs to
our Nation, especially to those in the underbanked areas, are
severe, they are supplied primarily by independent operators,
includes Americans that receive benefits monthly through the
EBT cards. Many of these Americans depend upon our ATM machines
to be able to access cash each month.
NAC, and including myself just last July, met with the
acting comptroller and his senior staff at the OCC (Office of
the Comptroller of the Currency). We have offered to work with
the OCC toward finding resolutions that would further the
common interest of NAC, the OCC, and other banking agencies to
achieve varied and effective enforcement of statutes,
regulations, while assuring availability of financial services
to law-abiding legitimate businesses without imposing undue and
unfair treatment.
With respect to the subcommittee, we would appreciate it if
you would join us, and urge the Comptroller's Office and other
Federal agencies to work with NAC and the men and women of NAC
to make this industry a safe industry and an operational
industry that everyone can work with.
[The prepared statement of Mr. Baxter can be found on page
40 of the Appendix]
Chairman Luetkemeyer. The gentleman yields back.
With that, Mr. Oxman, you are recognized for 5 minutes.
STATEMENT OF JASON D. OXMAN
Mr. Oxman. Thank you, Mr. Chairman and thank you to--thank
you Mr. Chairman. And thank you to you and Ranking Member Clay
and the subcommittee for having us here today.
The Electronic Transactions Association (ETA) appreciates
the opportunity to speak to the payments technology industry's
efforts to fight fraud and ensure that all consumers have
access to safe and convenient financial services.
ETA is the leading trade association for the payments
industry. We represent more than 500 companies that offer
electronic transaction processing products and service. In
short, ETA members power commerce in this country.
It is an exciting time in the payments industry. Consumers
and merchants benefit from a robust payment system that
provides nearly universal access and strong consumer
protections against fraud.
Consumers can pay for goods and services using a wide
variety of new payments technologies, ranging from EMB chip
cards to mobile wallets to contactless cards. All of these are
secured by advanced technology including encryption and
tokenization, and consumers are protected against any liability
for fraud.
Now, notwithstanding this progress in technology there have
been challenges, particularly from Operation Chokepoint. It has
contributed to the de-risking and ultimately limited consumer
access to financial services while also making it more
difficult for legitimate businesses to access the payment
system.
Today I would like to, in particular, thank Chairman
Luetkemeyer for his efforts in fighting Operation Chokepoint
and for H.R. 2706, which we look forward to seeing enacted into
law.
I would also like to highlight the way that ETA members and
the payments industry combat fraud and explain why a
collaborative approach between Government and private sector,
as opposed to an approach like Operation Chokepoint, is the
best way to protect consumer interests and expand financial
inclusion.
As payments companies are generally responsible in most
cases for fraud in the first instance under both Federal law
and payment network rules, our industry has a strong interest
in making sure that fraudulent actors do not gain access to
payment systems. And we found considerable success.
In 2016, nearly $6 trillion in credit, debit, and prepaid
card transactions were processed in the U.S., of which only $9
billion was fraudulent. That is a fraction of a tenth of a
percent.
In addition, a recent survey of ETA member companies found
that more than 10,000 merchants were discharged from the
payment systems for fraud last year. For both back-end systems
as well as consumer payment products, payment technology firms
have heavily invested time and resources into ensuring data
security.
For example, ETA members have deployed effective due
diligence programs to prevent fraudulent actors from accessing
payment systems and terminating actors who are fraudulent from
the systems. Those programs have helped to keep the rate of
fraud on payments at remarkably low levels.
ETA also works closely with industry leaders and Federal
regulators like the FTC (Federal Trade Commission) to establish
guidelines that prioritize security and risk mitigation. In
2014, ETA first published our guidelines on merchant and ISO
underwriting and risk monitoring.
In 2016, we published the Payment Facilitator Guidelines
and today we are pleased to announce the 2018 update to the ETA
guidelines. These new guidelines published today contain
updated industry best practices, including updates with the
Financial Crimes Enforcement Network's (FinCEN) new beneficial
ownership rule.
These guidelines provide a basis for payments companies to
work cooperatively with Federal regulators and law enforcement
toward our shared goal of stopping fraud. Unfortunately, such
cooperation has not always been the case.
For example, Operation Chokepoint employed the wrong tools.
It was unnecessarily confrontational, and it created serious
risks to law-abiding processors without producing any benefits
to consumers. It was based on the flawed assumption that
increasing liability on lawful payment companies for the
actions of legal merchants would somehow reduce fraud.
In practice, such new liability standards on payments
companies resulted in serious adverse consequences for both
merchants and payments companies as well, the blunt force
discouraged banks and other processors from working with legal
merchants that were branded as politically unfavored.
Although Operation Chokepoint thankfully has been halted,
it is important to recognize there is nothing to stop the
Department of Justice or the CFPB (Consumer Financial
Protection Bureau) or the FTC or even a State attorney general
from bringing a case today that looks very much like Operation
Chokepoint.
We are one of the most innovative industries in the world
in payments. Our job is to provide unbanked and underbanked
consumers and merchants access to financial systems. And we
look forward to an opportunity to work collaboratively with
Government and with law enforcement to fight fraud in ways that
are more productive than Operation Chokepoint.
Thank you for the opportunity to be here today.
[The prepared statement of Mr. Oxman can be found on page
74 of the Appendix]
Chairman Luetkemeyer. Thank you, Mr. Oxman.
Dr. Orozco, you are recognized for 5 minutes.
STATEMENT OF MANUEL OROZCO
Dr. Orozco. Thank you very much, Mr. Chairman. Members of
Congress thank you for allowing me to testify upon this subject
of de-risking, particularly providing solutions to this
problem.
The ecosystem of financial services today is far more
complex than at any other point in time. There is an amazing
accessibility of financial services, financial vehicles, and
financial institutions providing services to people and to
businesses to operate. That has created a very complex web of
interrelationships that has enabled a much more robust system
of financial services to people.
However, in many cases we have noticed we have seen that
banks have deemed and perceived the handling of third-party
funds from these MSBs a financial risk. My colleagues have
explained some of the reasons and the problems they face with
this problem. And overall, what we find is at least three major
patterns.
The first one is that decisions to terminate bank accounts
occur and permanently add discretionary scope with limited
accountability. There is a problem of transparency and
accountability in explaining why a bank account is terminated
against a money service business.
Second, and this is a troublesome issue, is that the
relationship between the trade and the account closing do not
occur clearly in correspondence to what risk is happening.
For example, we see money transfers taking place from parts
of the United States through other parts of the world and there
is no correspondence between the risk perceived and the real
threat taking place.
Another problem is that the increasing financial services
is mostly coinciding with the increase in determining account
closures. There are at least five issues where this problem can
be solved.
The first one is it is important to deal with more
transparency and accountability among permanently bank and
financial institutions.
Second, it is really important to look into better industry
trade and also country risk assessment. Many of the assessments
of receivers are not evaluated properly in terms of where the
threat is happening.
Data sharing through risk-based data clearinghouses is also
an important area of attention. For example, many of these
companies, the money services businesses, are the first line of
defense against financial crimes.
And they have significant knowledge and information about
where perceived threats can happen and how to stop them.
Sharing that information will be important to really address
the threats.
Another important aspect is that it may be important to
consider to include bank MSB services in the review of the
Community Reinvestment Act. The Reinvestment Act tried to look
into how banking institutions are providing financial services
to underserved communities. And when it comes to the account
closures, this is really an important matter.
There are differing experiences in countries where the
requirement is to expect banks to really provide documentation
as to the reasons of account closures can really improve the
support of MSBs.
In Spain, for example, in Europe, in the European Union,
the Payment Service Directive requires that if a bank is going
to close an account it needs to justify why they are doing it
and document it. Giving the right also of rebuttal to an MSB is
also an important procedure.
When it comes to risk assessment, I think we need to work a
little bit more on that. The existing data on country and
industry risk is not systematic and oftentimes is not shared.
The assessment of risk does not always coincide with the
account closures, although for example when we look at
remittance cross-border payment companies, they are able to
manage risk. There is a recognition that they do significant
work along those lines.
But when we look at the correlation between risk and money
transfer to different regions in the world the correspondence
doesn't exist, yet those companies are actually affected along
those lines.
Thank you very much.
[The prepared statement of Mr. Orozco can be found on page
68 of the Appendix]
Chairman Luetkemeyer. Thank you, Dr. Orozco and thank all
the witnesses for their testimony today.
With that, I recognize myself to begin the questioning for
5 minutes.
Mr. Schneider, it would seem to me after listening to all
the testimony this morning that the regulators seem to be
putting pressure on the financial institutions to the point
where they are making decisions to no longer be able to
continue making relationships with different entities.
And whether there is any fire to the smoke that is being
blown at them, is hard to assess, but it would seem to me that
your job as a financial regulator is more to watchdog, to watch
over the banks, the financial institutions, to see that they
are doing things according to the law versus micromanaging.
Would you agree with that statement?
Mr. Schneider. Fundamentally. We don't run banks. Banks run
banks. We are here to make sure that they operate in a safe and
sound manner and by no means--if they make a business decision
that certain types of business are not consistent with their
mission, that is fine.
But they shouldn't feel untoward regulatory pressure to
disqualify certain categories of legitimate businesses from
their portfolio because of regulatory pressure. And we make
that clear when we talk to banks, quite candidly.
Chairman Luetkemeyer. Well, every bank has a different
business model. A credit union has a different model.
Mr. Schneider. Exactly.
Chairman Luetkemeyer. And they are all located in different
communities. They have different needs.
Mr. Schneider. Right.
Chairman Luetkemeyer. And they are different sized,
different sorts of makeups. By the way, their economies are all
diversified. It is important, I think, that you have the
discretion to be able to go in and allow the bank to do what it
needs to do to grow the local economy and make it all happen.
It is frustrating to see this happening.
When you see--I had people, with regards to the BSA/AML
stuff, and a couple of you guys are caught in this, especially
the southern tier States.
Banks are doing banking business with individuals and
companies in Central and South America are being chokepointed
out by the bigger banks here in this country saying we are not
going to do business with you because you do business down
there.
Mr. Schneider. Right.
Chairman Luetkemeyer. How can these banks micromanage these
other banks? They're just customers of them--
Mr. Schneider. In some cases I think this is perhaps
fundamentally because of a lack of understanding of the
significant oversight that money service businesses have at the
State level. They are licensed by State regulators across the
country and examined in depth.
We in the State system have the capacity to examine every
multi-State operating money service business on a pace of once
every 18 months. These are heavily regulated businesses, and if
banks understood that better I think they may be less reluctant
to bank them.
Chairman Luetkemeyer. Mr. Baxter, thank you for your
service. You mentioned you were a Marine, and I appreciate
that. You are one of the industries that has just in recent
times been targeted. You weren't on the initial list of the
FDIC high-risk businesses, but you have become a target for
them.
Can you tell me what you believe why that has happened and
the response that you are getting? And how you are going to try
and approach all this and any other comments you would like to
make? Because I know you are in the crosshairs right now.
Mr. Baxter. I believe that with the inception of Operation
Chokepoint, it particularly reached a stage in which regulators
were going into banks and asking specifically do you have ATM
accounts?
That is a specific question of targeting one specific
industry where they are almost requiring--and I can't say they
are requiring because I am not standing in their offices. And I
am not involved in these conversations.
But when you start receiving letters in the mail from your
bank, such as I did and many of my clients did and many of my
colleagues did throughout the industry, that have simply zero
explanation as to why your account is being closed, doesn't
even mention that you are high risk, but it has zero
explanation, and you call to ask for an explanation because you
now feel like a criminal, you get no explanation.
I would ask the committee to consider why is it that the
banks and the regulators apparently, from what I see and what
we see in our industry, do not want us to be in business?
Why do we want to remove what has been an excellent system
in managing ourselves through our system that we have with
sponsoring banks, network rules, applying everything that we
can through the industry standards to operate an ATM machine
exactly as a bank operates an ATM machine?
Yet all of a sudden we are deemed unacceptable citizens in
society. How are we going to go about replacing 60 percent of
all the ATM machines in the United States?
Chairman Luetkemeyer. My time has expired. Thank you very
much for your comments.
With that, we go to the Ranking Member of the committee,
Mr. Clay, the gentleman from Missouri, recognized for 5
minutes.
Mr. Clay. Thank you, Mr. Chairman and let me go back to Mr.
Baxter. Some industry actors have stated that the types of
extreme fluctuations in cash turnovers that are a normal part
of the ATM business are actually triggering regulatory acting
that results in banks closing accounts for ATM owners and
operators.
Can you discuss what is pushing financial institutions to
de-risk in these situations in spite of knowing the needs of
this type of small business?
Mr. Baxter. Well, let me address the fluctuation of cash
that you brought up. That occurs throughout various times of
every month in every city and State. The first of the month is
heavier usage so you see a higher fluctuation of cash out and
cash back in.
There are other instances that will create that. We are
also asked on a regular basis by NASCAR, by carnivals, by fairs
in every city, State that you can think of to supply ATM
machines so that vendors have cash available to sell hot dogs
and corn dogs and Cokes to men, women, and children.
So we do that. That is what we do. That is how we make a
living.
Mr. Clay. Yes.
Mr. Baxter. That is how our cash can influx and change.
Mr. Clay. Mr. Baxter, why do you think there are more
independent ATMs located in areas with higher concentrations of
underbanked and unbanked citizens as opposed to the big banks,
Chase Manhattan, Bank of America, locating their ATMs in those
areas?
Mr. Baxter. Because we are hungry. We are willing to do
that. We are willing to go into those areas. We are willing to
service those communities. The banks are not. They are not
willing to do that.
Mr. Clay. The banks just turn their back on people who they
don't think they can make enough money off of, is what you are
saying?
Mr. Baxter. That and potentially risk of robbery, which we
take that risk.
Mr. Clay. The risk of ATM robberies?
Mr. Baxter. Yes, sir, of the ATM machines being broken
into.
Mr. Clay. OK. Is that--
Mr. Baxter. Our ATM machines, sir, are located inside
convenience stores, for example--
Mr. Clay. Sure.
Mr. Baxter. --and most convenience stores throughout the
country. Those businesses are not open 24 hours a day and
sometimes those businesses get broken into--
Mr. Clay. I see.
Mr. Baxter. --and our cash gets stolen.
Mr. Clay. I see. All right, thank you for that--
Mr. Baxter. You are welcome.
Mr. Clay. --response.
And Mr. Schneider, what actions have your department taken
to assess the impact that de-risking may be having on access to
financial services for vulnerable populations?
Mr. Schneider. Well, it is certainly a concern to us that
all of the citizens in all of our States receive a wide variety
of financial services. In my State we have very large banks, we
have very, very small banks, and we have all sorts of non-
depository institutions.
We talk with our banks to make sure they understand the
risks that certain types of clients present to them so they
don't make a misinformed decision to disqualify a certain type
of actor from getting banking services.
And we work closely with innovators who are trying to bring
new financial services to traditionally underserved communities
so that they are able to deploy them quickly.
And our role is to be nimble, to foster innovation, and
fundamentally to make sure everyone understands that if you are
dealing with a non-depository money service business they are
appropriately and thoroughly regulated, including for BSA/AML
compliance.
Think about that level of scrutiny that they are receiving
when you are making your risk decision as to whether or not to
bank that particular company.
Mr. Clay. And have you found that independent owners of
ATMs' fees are higher than regular banks or how does that work?
Mr. Schneider. I don't want to misreport anything. We don't
have studies in Illinois that I am aware of that look at those
fees.
We have actually tried to reduce regulatory burden on non-
bank ATMs, eliminating unnecessary registration requirements,
so hopefully that can help drive lower fees for everyone.
Mr. Clay. It is possible that the regular banks charge
higher fees or just don't want to be in those communities at
all?
Mr. Schneider. It is entirely possible and that could be
something that we should get to studying at some point.
Mr. Clay. Thank you so much and my time is up.
Chairman Luetkemeyer. The gentleman's time has expired.
With that, we go to the Vice Chair of the committee, the
gentleman from Pennsylvania, Mr. Rothfus, is recognized for 5
minutes.
Mr. Rothfus. Thank you, Mr. Chairman.
Mr. Oxman, during the Obama Administration the Federal
Deposit Insurance Corporation released a list of supposedly
high-risk businesses that should be targeted for possible de-
risking. This list included payday lenders, tobacco vendors,
and pawnbrokers. Do you know how this list was populated?
Mr. Oxman. Thank you for the question, Mr. Vice Chairman.
That list I think is one of the most stark examples of what
Operation Chokepoint was really about. It was effectively a
concession that this was a list of politically motivated,
targeted merchant categories as far as we could tell, that were
otherwise offering legal services.
But it was a signal to the payments industry that providing
lawful payment services to those merchant categories would
result in heightened scrutiny by Federal regulators.
That was the entire purpose behind Operation Chokepoint.
Seeking to effectively deputize payments companies in a, what
we considered a politically motivated, by the prior
Administration, effort to target disfavored merchant
categories.
Mr. Rothfus. Well, was there a basis that the FDIC could
decide that these industries were high risk?
Mr. Oxman. As far as we could tell, looking at the list
published by the prior FDIC, the basis was not one of any
substance based on anything that we could determine other than
a signal--
Mr. Rothfus. What signal--
Mr. Oxman. --to our industry to stay away from those
disfavored merchant categories.
Mr. Rothfus. What about risk in the sense of high risk? Was
there a definition for, quote, ``high risk''?
Mr. Oxman. The prior FDIC did not provide us the kind of
guidance that would have been a tie between the delineation of
those merchant categories that you mentioned and the very
sophisticated risk analysis that our industry has been using
effectively for decades--
Mr. Rothfus. Well, that is--
Mr. Oxman. --to prevent fraud.
Mr. Rothfus. Risk in the sense of a risk to the financial
system? Risk in the sense of, look, there are actors out there
that we suspect might be engaged in some activity? Again, I am
trying to get my arms around what was, quote, ``high risk//?
Mr. Oxman. Our industry, the payments industry, has been
working in conjunction with Federal regulators literally for
decades on management of risk issues, does have very
sophisticated, very effective means of determining high-risk
merchants. And it is not done necessarily by the type of
categories that you mentioned.
That type of listing of merchant categories without any
further analysis--
Mr. Rothfus. Well, what is a high--what would be a high-
risk merchant?
Mr. Oxman. A high risk merchant would include an analysis,
for example, of what we call chargebacks. Chargebacks are
effectively returns initiated by consumers using their credit
card or debit card at a merchant. If chargebacks reach a
particular level, that suggests that there might be something
going on and that the merchant should be examined more closely.
Again, has nothing to do with the category that the
merchant happens to be in or the particular products the
merchant has to sell.
Mr. Rothfus. So there was a prejudice going in where that
analysis wasn't done?
Mr. Oxman. It appeared to us in examining the list provided
by the prior FDIC that it was based on the types of products
sold and not on actual analysis of the relative risk to the
payment system of those products.
Mr. Rothfus. Mr. Schneider, in your testimony you said that
virtually all States have a rigorous licensing and reporting
and examination processes in place for money service
businesses. You also described some of the enforcement actions
that State regulators have taken against the bad actors.
When you consider the strong role that State regulators
play in ensuring that money service businesses are not conduits
for illicit finance, it is interesting that Federal regulators
still targeted these businesses for de-risking. Do you believe
that State-level regulators are doing enough to counter the
abuse of our financial system by illicit actors?
Mr. Schneider. I certainly do. Again, we conduct numerous,
hundreds of exams each year of money service businesses,
including for BSA/AML compliance. And we are on the frontline
with those companies to help them understand what their own
risks are.
We just today issued a self-assessment tool that money
service businesses can use on their own to better understand
their risks so that they mitigate their risks so when we come
in to examine we can give them a clean bill of health.
I think State regulators are really on the frontline in
making sure these non-depository institutions follow the law.
And that should give great comfort to our Federal counterparts,
as well as to banks. And my--
Mr. Rothfus. Well, on the Federal counterparts, are Federal
regulators consulting with the State regulators?
Mr. Schneider. We work very closely with Federal
regulators, FinCEN, the OCC, the FDIC across the board. Mr.
Williams has a bill, H.R. 3626 that would help us cooperate
even greater with our Federal counterparts.
Mr. Rothfus. My time is expired. Thank you.
Chairman Luetkemeyer. The gentleman's time has expired.
With that, we go to the gentlelady from New York, Mrs.
Maloney, recognized for 5 minutes.
Mrs. Maloney. Thank you. I want to thank you and the
Ranking Member for holding this hearing. And I think it is on a
tremendously important issue, and I am very sympathetic to
neighborhoods in our country having access to ATM machines. It
is in some cases the only banking access they have.
When I was on the city council I represented a very
economically challenged neighborhood, East Harlem. And the
banks redlined it, meaning they all left. They just closed
their doors and left without any banking services.
I remember I appealed to them to pool their resources and
leave one ATM machine so there would be some banking in this
underserved neighborhood. And they wouldn't do it. And then one
bank opened up an ATM machine and left it in the community and
I am very grateful to this day to that bank.
When people close up all these ATM machines they are really
closing up access to capital and to banking in communities. And
I feel that we have a responsibility to make sure that all
neighborhoods are served and if banks don't want to be any part
of helping low-income neighborhoods, then maybe we have to look
at doing something through the Federal Government. We have to
figure out some way to help them.
I first want to ask Mr. Baxter, as you know, there is a lot
of evidence that some banks are terminating the accounts of
independent ATM operators. And they say that they are doing it
because of regulatory risk and the pressure from the
regulators.
But there are sometimes allegations that they are doing it
for competitive reasons, that they don't want the independent
ATM operators competing with the bank's own ATMs. But sometimes
when the banks do this, they claim that they are doing this
totally for regulatory reasons.
And how can we ensure that they aren't using the concept of
regulatory risk as an excuse to undermine their competitors?
Mr. Baxter. Thank you for asking that question, and I do
agree with your statement in that there is a competitiveness to
this theory of closing down companies that have been in
operation for 10, 15 years--in my case, in my company for 4
years.
I can't really answer why they have taken this position all
of a sudden other than it does cause you to think that maybe
there is a competitive edge here that the bank is interested in
as well. But our industry has been in existence, as I said
before, and approved to be in existence since 1996.
My question that I would love to ask the banks and the
regulators and even the administrations of our country that
have made decisions to close our bank accounts is what happened
overnight where we all of a sudden became a high-risk business
that exists in this country that hadn't existed for 14 years
that I have been in the industry in total?
It is overwhelming and shocking to have businessmen that
have invested in small business their life savings, that are
school bus drivers in Tennessee, that have various other
occupations that they do besides their small ATM business to
bring cash to America.
And that is the way I look at it. We bring cash to America.
We are not a money service business. We are a business that
delivers cash to America.
I really don't know how we can overcome what is currently
taking place without your help, without your insight, without
your leadership to hear our cry and to hear that this industry
is suffering and it will ultimately go away if something isn't
done by the great country that we live in and the people that
lead this country.
Mrs. Maloney. Where are there more independent ATMs but no
bank ATMs?
Mr. Baxter. Where are there more? In rural areas.
Mrs. Maloney. In rural areas?
Mr. Baxter. And underserved banked areas.
Mrs. Maloney. So in low-income areas and rural areas?
Mr. Baxter. Correct.
Mrs. Maloney. And--
Mr. Baxter. But you will find us also in malls, cities all
over the country.
Mrs. Maloney. And if banks just cutoff all independent ATM
operators, who would be harmed the most?
Mr. Baxter. America in general will be harmed the most. The
people that are underserved and underbanked will be hurt the
most. That is who will be hurt the most, in addition to the
hundreds of ATM operators that will be placed out of business.
And I will have to look over to this beautiful lady in
blonde hair sitting to my left over here, who I made a
commitment to 4 years ago when I joined in with my partners to
start this business and tell her I have failed when I promised
her I wouldn't.
Mrs. Maloney. Oh, my time has expired. Thank you.
Chairman Luetkemeyer. The gentlelady's time has expired.
With that, we go to the gentleman from North Carolina. Mr.
Pittenger is recognized for 5 minutes.
Mr. Pittenger. Thank you, Mr. Chairman.
I do thank each of you, our distinguished panelists, for
being with us today and your perspective is well-received and
important for all of us.
Mr. Oxman, I would like to go to you first. I would like
you to speak additionally to the tools and technologies the
payments industry has developed to protect consumer financial
information?
Mr. Oxman. Thank you, Congressman, and as you well know,
having the second largest banking hub in the country in your
district--
Mr. Pittenger. Sure, thank you.
Mr. Oxman. --financial institutions are working with
technology companies to deploy technologies that protect
consumers. They have consumer-facing components to them. As the
FinTech industry we are deploying mobile payment services and
chip card services and even contactless card services.
Anybody who has been watching the Olympics has seen that
tap-to-pay technology--much more secure than any technology we
have ever deployed in the history of our industry.
And on the back office side, if you will, on the network
side, we are deploying encrypting and tokenization services
that protect consumers' information and guarantee them 100
percent liability protection against any fraud.
Mr. Pittenger. All right. Good, thank you. Speak as well
then to the incentives that the payment industry has, and
businesses have to prevent fraud?
Mr. Oxman. Yes. I think that is a very important question
because in the payment systems, our industry in the first
instance has liability for fraud as any consumer who has seen a
fraudulent charge on their credit card statement knows, they
need only contact their card issuer, their financial
institution, and report that fraud and they don't have to pay
for it.
Well, guess who has to pay for it? We do in the payments
industry. The incentives could not be more powerful for the
payments industry to protect against fraud. We have done a good
job with about $7 trillion in payments processed in the U.S.
last year. Only about $9 billion of those were fraud so it is a
fraction of a tenth of a percent.
But the criminals, they are smart. They are active. And
every time we deploy a new solution they move on to the next
criminal activity so we have to remain vigilant. But the
incentive on us is very powerful as you noted, because we have
liability for fraud if we don't stamp it out.
Mr. Pittenger. Yes, sir, thank you.
I would like to ask each of you since the financial crisis
many institutions are terminating relationships, as we all
understand, with consumers or companies deemed high risk,
complex, or not profitable. Why do you believe we are seeing
financial institutions terminate these longstanding accounts
held by certain industries?
And I would just like you to elaborate further on that, Mr.
Schneider?
Mr. Schneider. Well, again, I go back to I think there can
be just a misunderstanding as to the degree to which regulators
supervise non-depository money service businesses. Maybe there
is some notion that they are not looked after, that they are
this big gaping BSA/AML risk because they are not supervised,
and that is just not the case.
And I think our data shows that and if banks begin to
better understand that, they won't view these companies as
inherently risky because they know that they are being
supervised.
Mr. Pittenger. Well, to that end, what specific actions can
Congress take to combat the trend in de-risking?
Mr. Schneider. Well, one thing would be collaboration among
regulators. Our Federal system is a beautiful one. It provides
some regulators like State regulators very close to entities
and Federal oversight at a national level.
Our ability to work with our Federal partners effectively
is a great value. Then everyone gets the same message being
delivered as opposed to mixed messages. So again, I mentioned
H.R. 3626. We can't communicate as freely as we should with our
Federal counterparts concerning money service business
supervision.
If that avenue was opened up for us I think there would be
more consistent messaging.
Mr. Pittenger. Thank you.
Mr. Baxter, as you discussed your difficulties and
challenges, have any of the banks that have been closing
accounts, have they been willing to sit down and discuss with
you the accounts and why they are being closed?
Mr. Baxter. Absolutely not. You are sent a letter, two
pages, approximately two pages with an 800 number on it if you
have any questions.
When you call the 800 number the voice on the other end of
the phone tells you that you received the letter. You reply,
``Yes, I did.'' They said your account will be closed in the
timespan in which it stated on the letter.
When you ask why your account is being closed there is no
discussion. They have nothing to say other than the enforcement
of the letter will take place.
Mr. Pittenger. Mr. Schneider, do you have any more response
to that?
Mr. Schneider. Well, at the end of the day, banks do make
decisions. We would like to encourage our banks to be as open
and forthright with their customers as they possibly can be,
and again, to not make broad generalizations about industries
but to look at individual risks and how they are appropriately
mitigated.
Mr. Oxman. And Congressman, if I may, this is why H.R. 2706
is so important because it sends a very strong legal signal to
banks that they don't have to shut off what regulators have
deemed risky industries just because they are on a list of
risky industries.
The banks want to serve customers. They want to serve
merchants. And we need to make sure that they don't cut people
off just because regulators are putting pressure on them to do
so.
Mr. Pittenger. Thank you, very good. My time is expired.
Chairman Luetkemeyer. The gentleman's time has expired.
With that, we go to the gentleman from Georgia, the
distinguished Mr. Scott, who is recognized for 5 minutes.
Mr. Scott. Thank you, Mr. Chairman. As I am sitting here
listening to this hearing, I am reminded of my favorite
playwright, William Shakespeare. And he wrote my favorite play,
Julius Caesar.
And if you all recall, familiar with Shakespeare, when
Julius Caesar's walking through the Roman gardens with Brutus
and Marc Antony, there is this woman that wails, ``Beware the
Ides of March.''
Well, I am here to tell you we need to beware of the ides
of our banking regulators and nowhere--nowhere is this more
poignant than with our pawnbrokers. Let me give you an example.
Here are our pawnbrokers who are the main, almost final
lifeline to the unbanked and underbanked. And because of this
overregulation, because of this extension through the Bank
Secrecy Act and money laundering, all of a sudden to de-risk
they are closing the bank accounts of the very people who are
there to give lifeline to the most underbanked and unbanked by
making the institutions in our financial system unbanked and
underbanked themselves.
Now, why is this? Can you all tell me why these banks are
taking away and closing down the banking accounts of businesses
that have been loyal customers and have had great
relationships, no problems. Why? And what must we do to stop
it?
Mr. Schneider. Speaking as a regulator--
Mr. Scott. I really want to hear from all of you on this
because--
Mr. Schneider. --we--
Mr. Scott. My Shakespearean moment would be meaningless if
we do not get to the bottom of this because March is rapidly
approaching.
Mr. Schneider. It is very close. Well, we regulate pawn
dealers in my department, so I have great familiarity with the
services that they provide. And I just keep coming back to I
think it is misunderstanding.
Data will ultimately be our friend. Risk can be--I think we
as regulators have to make sure we are talking to the
institutions that we regulate. And when we talk about risk we
talk about risk as something that you mitigate, something that
you understand and that you process and that you mitigate.
And as State regulators, we are trying to give our
institutions the tools to do that through our BSA/AML self-
assessment tool.
Mr. Scott. Yes, but the issue--
Mr. Schneider. That they will understand that and then make
better decisions.
Mr. Scott. Yes, the issue is here we are in Congress and
deal with the power of the people to do something about this
sort of thing. And we need you all to tell us do we need to
pass a law to prohibit these banks from just arbitrarily
closing down an account of a pawnbroker who has been servicing
these low-income people who have no other choice until they do
something?
We have to do something here.
Mr. Oxman. Yes, Congressman--
Mr. Scott. What must we do here?
Mr. Oxman. Yes, I think, Congressman, it is H.R. 2706
really that needs to continue the march toward the President's
desk because these banks that you are referring to they don't
want to shut off customers either.
But they are being pressured to do so by overzealous
regulators or they have been historically. Our hope is that the
regulatory environment will continue, but as you well know,
having the hub of the payments industry in Georgia--
Mr. Scott. Right.
Mr. Oxman. --our industry is desperate to serve those
merchants that want us as service providers. We don't want to
shut anybody off, but in many cases regulators are forcing that
to happen. And that is what we need to have come to an end.
Mr. Scott. Yes, and as Democratic chairman of the FinTech
Caucus, you know how vitally I am concerned. And we need to
prohibit this. We need to send a very loud message to the
banking community.
And you all who are banking regulators or State regulators
need to stop this, put something in place and stop cutting off,
because then we cut off the banking account, you got nothing.
Even with me, can you imagine if the bank cut me off as a
citizen or you? You are out there in no man's land.
Yes, sir, Mr. Orozco, yes. I think you were next.
Dr. Orozco. Thank you. I think there is a moral hazard
between banks and regulators about how to tackle risk. It is
you can put--they play--they put the blame on banks. The banks
put the blame on regulators.
The fact of the matter is that there is a problem, a
serious problem of transparency and accountability on both
sides, and that is what needs to be tackled at this point. And
the instrument exists.
Mr. Scott. Mr. Baxter, could you--
Chairman Luetkemeyer. Real quick.
Mr. Scott. --because the pawn--just real quick, thank you,
Mr. Chairman, because the pawn shops are not in this by
themselves. Your money machines are in this same vise, am I
right?
Mr. Baxter. Yes, sir.
Mr. Scott. And what do you think we need to do?
Mr. Baxter. Well, I do think that there are overzealous
regulators out there. I do think that there was a misconception
in business in general as to what businesses need to be
targeted.
In our industry, as I said, that we are vetting that is
done with each and every one that wants to enter into this
business to own and operate ATM machines. Individual vetting--
Mr. Scott. Well, thank you.
Mr. Baxter. --includes background checks, which we do a
U.S. criminal report, an OFAC report, a Patriot Act search,
watchlist, driver's license search, bankruptcies, liens, and
judgments, secretary of State filings, U.S. sex offenders,
personal credit report, business report. All of this is done
before--
Mr. Scott. Thank you.
Mr. Baxter. --the corporation MicroBilt in my situation and
my sponsoring bank highly recommended that our corporation use.
We have--
Mr. Scott. Thank you.
Mr. Baxter. --followed that to the tee.
Mr. Scott. Thank you so much.
And thank you, Mr. Chairman, for giving that little extra
minute. And I would like to submit this record from the
National Pawnbrokers Association to the record.
Chairman Luetkemeyer. Without objection, and we appreciate
the gentleman's passion on this issue as well.
Mr. Scott. Thank you, sir.
Chairman Luetkemeyer. With that, we go to the gentleman
from Tennessee, Mr. Kustoff, recognized for 5 minutes.
Mr. Kustoff. Thank you, Mr. Chairman.
And I do thank the witnesses for appearing this morning.
Mr. Oxman, I also appreciate the comments regarding
Operation Chokepoint as well as the dissertation in your
written testimony. If I can, as it relates to Operation
Chokepoint, there is no doubt and you stated that that
accelerated, if you will, the de-risking of financial
institutions and forced some consumers out of the financial
system entirely.
That could, as it relates to the regulators. Can you state
was there overreach by Federal regulators as a result of
Operation Chokepoint? And if the answer is yes, can you give
examples of that overreach?
Mr. Oxman. The answer is most definitely yes, Congressman,
and thank you for the opportunity to highlight that overreach.
I would give rather than my assessment, I would give the
assessment of the court system. For example, in Georgia, which
found that the prior CFPB, prior to the current Administration,
had overreached so badly under Operation Chokepoint that they
were sanctioned.
The CFPB was actually sanctioned for their overreach
against one of our member companies. The entire case was
dismissed with sanctions against the CFPB.
That is but one of many examples of overreach by Federal
regulatory agencies that made Operation Chokepoint such a
danger to, frankly, our economy because it does, as you have
heard so much about today, cause financial institutions to
effectively shut off their own customers because of concern of
that regulator overreach.
We hope to never see that again, but sadly there are
numerous examples across many agencies from the prior
Administration.
Mr. Kustoff. Thank you, Mr. Oxman.
Mr. Schneider, from your vantage point in your State, can
you testify as to whether there was overreach by Federal
regulators as a result of Operation Chokepoint and the impact
that that had in your State?
Mr. Schneider. Yes, I think there was. The fact is Federal
regulators see largely the perspective from just the banking
side of it is different than ours at the State level where we
see banks and non-depositories, and we get insights into all of
them.
And we did see people doing legitimate businesses losing
their accounts in Illinois. And then that is pushing business
into the cash economy, which seems to us to be one of the most
unsafe ways to conduct business, having people haul bags and
boxes of cash around.
I do think there was some overreach. It led to bad business
decisions who were making decisions based on what they
perceived as regulatory requirements rather than good, sound
business practices and risk mitigation strategies. And
arresting the attention of the Federal regulators through 2706
and other efforts on your behalf could help the situation.
Mr. Kustoff. And when these customers no longer have access
to the financial products, to the institutions, where do they
ultimately go and what do they ultimately do?
Mr. Schneider. Well, to some extent, it is a question you
hate to even think about because they won't have choices. There
are areas in my State that critically rely on non-depository
financial services providers. They need accounts to operate.
And we would be talking about people going into areas we
don't want them to go into such as loan sharks and things like
that. We don't want that happening. We want people to have
access to a variety of financial services.
Mr. Kustoff. Thank you.
Thank you, Mr. Chairman. I yield back the balance of my
time.
Chairman Luetkemeyer. The gentleman yields back.
Now we go to the gentleman from Minnesota. Mr. Ellison is
recognized for 5 minutes.
Mr. Ellison. I thank the Chairman and the Ranking Member
for the time.
Let me just make an editorial comment. Operation Chokepoint
started in 2013. It has now been officially ended. That is
important for the record.
Also, too, I do resist the idea that there was some
nefarious political motive. I think that you had people who
were trying to stop fraud and they did it, in my opinion, the
wrong way.
And just like putting an extra burden on all the businesses
that you all represent I think in many ways had the opposite
effect that was intended.
I think Mr. Schneider you might have hit the nail on the
head where it is, look, if you shut down all these businesses
this way, it is not like people will not do business, they will
do it. But maybe you will go into a cash economy.
It is actually legal to get a suitcase full of cash and
carry it from Minnesota to Mogadishu. It is not illegal. You
have to declare it and there are other protocols, but it is
among the most dangerous ways to transmit that money. And you
for sure don't know who is going to end up getting that money
then.
The fact that we have said we are going to do all these
things to cut off access, it has had the opposite effect, which
is why I think we ought to have hearings on how to properly de-
risk. Get people like you to tell us how we should write the
legislation rather than just somebody over at DOJ write up
something that they think would be good and then we end up
where we are now.
With that, I seek unanimous consent to introduce letters
from the Charity & Security Network regarding their problems
with the way we are doing business here. The Global Center on
Cooperative Security, they have a statement to this committee
on examining de-risking and its effect on access to financial
services.
And then also Mr. John Byrne, he submitted something on
examining de-risking and its effect on services. And I do ask
that these documents be allowed to be entered into the record.
These groups are on the front line of the effort to combat de-
risking, and I am pleased that they have taken time to share
their view with the committee.
Chairman Luetkemeyer. Without objection.
Mr. Ellison. So question, sudden and unexplained account
closures are creating serious problems for international
charities and the people that they serve.
For example, on January 29th of this year, Western Union
sent a U.S.-based international humanitarian organization a
letter closing its account immediately without any explanation
for the reasons for this drastic action or given the charity an
opportunity to even address the concerns. Going to your point,
Mr. Baxter, where is the due process?
When this happens, charities often have extreme
difficulties continuing their lifesaving work and those that
they need. And research shows that nearly 18 percent of U.S.
charities operating internationally are having problems opening
or maintaining bank accounts. I think this is a bad thing, and
I want to know what you think we should do about it?
Mr. Oxman. Well, Congressman, I think this is an example of
why, as you stated eloquently, the philosophy behind Operation
Chokepoint was wrong. The target of Operation Chokepoint was us
as payments providers, financial institutions. It is akin to a
bank robbery being planned over a cellphone call and law
enforcement going after AT&T for that.
What we would like to see, as you noted, is law enforcement
regulators pursue the actual fraudsters instead of seeing the
service providers that provide millions of Americans,
merchants, consumers, charities, nonprofits, access to payment
systems. They shouldn't be targeted. The actual fraudsters
should be targeted.
What you have seen as a result of the regulatory overreach
of recent years is, and you have heard a lot about it today,
financial institutions say you know what?
It is not worth the risk of regulators coming after me for
serving a disfavored industry, a charity that operates
overseas. I will just shut them all off then I don't have to
worry about anybody coming to see me and causing any problems.
And that is exactly the wrong approach, as you noted.
What we think is better and we think H.R. 2706 does this
right, is tell regulators, tell law enforcement at the Federal
level in particular pursue the fraudsters directly. Don't
pursue the service providers and tell them to shut off entire
categories. That is the wrong approach.
Mr. Ellison. Quick question with my limited remaining time,
do we ever get all these agencies together to just talk about
the effect of them being--they are trying to de-risk. It seems
to me the agencies are trying to say if any bad money gets
through we don't want to be blamed for it, so we are just going
to shut it all down.
Is there a need for greater coordination? What do you all
think in my time that I don't have anymore?
Mr. Schneider. Well, I would just say briefly, sir, your
piece of legislation, the Remittance Improvement Act is a
helpful step.
Mr. Ellison. Thanks.
Mr. Schneider. Again, we are there as State regulators
doing this. We will talk to our Federal counterparts any day of
the week for them to better understand what we are doing so
that they better understand the real risk and can focus their
exams.
Mr. Ellison. Let me thank everybody and the Ranking Member.
Sorry for going--and the Chair for going over.
Chairman Luetkemeyer. The gentleman's time has expired.
With that, we go to the gentleman from Georgia, Mr.
Loudermilk is recognized for 5 minutes.
Mr. Loudermilk. Thank you, Mr. Chairman, and thank you for
this hearing. It is no secret I have been a long critic of
overregulation by the Government to try to fix every problem
that exists in the world, and quite often that causes more
problems than it fixes. And I think that is one of the things
we are looking at here today.
I perceive our responsibility in Congress here is to
represent the people, the interests of the people. And I also
understand that it is the businesses out there that employ
those people and provide the services that people need.
And as spending 20 years as a small business owner, I have
lived through what some regulations, such as Operation
Chokepoint has done in the community. In fact, I have an
advisory council that is made up of businesses from small
businesses, mom-and-pop shops up to the executive managers of
large businesses in our district.
And I recently asked them at one of our meetings, and there
was probably about 100 in attendance, said if we could do one
thing for business and this was about 2 years ago, one thing
for business would you rather us cut taxes or work on reducing
regulation? Almost every one of them said reduce regulation.
And when I followed up I was a little surprised by it and
they said, yes, lowering taxes helps us as a business, our
bottom line, but the regulation hurts our ability to serve the
customer. And I guess that is what we are looking at.
And in fact, Mr. Baxter, my youngest son worked in the ATM
industry as security. He was in the Army as Airborne and so
they brought him on. He was also a private investigator. He was
brought on to be additional security for the business because
of exactly what you are talking about. They were forced to
carry around a lot of cash.
And so that was his initial job. He has moved on to do more
technical things at this point, but Mr. Baxter, the sheer
volume of regulations, is that the main cause of the de-
risking? Or is it a particular area of compliance like the BSA
or anti-money laundering?
Mr. Baxter. I was asked about money laundering just
yesterday as a matter of fact, Congressman. And I was asked can
it be done with an ATM? And I said I don't know. I am not a
money launderer. I am not a thief. I don't think like that. I
have never considered it.
I don't know anyone in business that I have worked with in
this industry that does. It is just not discussed. I would not
know how to do that.
Mr. Loudermilk. Yes.
Mr. Baxter. Yes, overregulation of our industry is what has
brought us to where we are today with bank closures. And I
agree with the gentleman that spoke earlier who said that, are
any of these departments talking with one another?
And I am not absolutely certain they are because I think if
they were there would be a lot more understanding of this
business, my business, and various other businesses that
provide cash and services to people throughout the country.
And so I think that is where the disconnect is at is that a
certain group of people have gotten together and decided that
they know what is best for everyone, but the reality of that is
just the opposite in terms of small business and what is
created by overregulating.
Mr. Loudermilk. Yes. I am afraid that often or at least in
the case of Operation Chokepoint what we see is somebody not
liking what is a legal business and taking it is our job to
determine what is legal and not legal in this Nation. And
somebody using regulation to make a moral decision to hurt an
industry. And we have to avoid that.
Mr. Oxman, I appreciate all of ETA's engagement and as well
as the American transaction processors. You and organizations
like both of yours engaging in this because you are the boots
on the ground working with those individual business owners who
really don't have the time to come up here and testify.
While we have you, when the fear of overregulation causes a
financial institution, like we have been talking about here, to
terminate a relationship with a FinTech company, isn't it
harder for the Government to go after the bad actors because
the business is now using cash?
Mr. Oxman. Yes, that is the irony of this, Congressman, and
as you know, the great payment processors headquartered in and
around Atlanta--
Mr. Loudermilk. Right.
Mr. Oxman. --in the suburbs struggle with this issue every
day to prevent fraud from happening. But they are able to
prevent fraud from happening because they are on the payment
systems. Once you kick them off the payment systems, and as we
have talked about, they find alternative ways, that we may not
be able to see, to provide service, it is a lot harder to
prevent that fraud from happening.
That is the ultimate irony of Operation Chokepoint. You are
kicking people off of the very systems that are designed to
prevent that fraud from happening.
Mr. Loudermilk. In my last 1 second, we basically, under
the guise of trying to protect the consumer, are harming the
consumer.
Mr. Oxman. That is right.
Mr. Loudermilk. I yield back, Mr. Chairman.
Chairman Luetkemeyer. The gentleman's time has expired.
With that, we will go to the gentleman from Texas, Mr.
Green is recognized for 5 minutes.
Mr. Green. Thank you, Mr. Chairman. Thank the Ranking
Member as well and the witnesses for appearing.
I would like to talk for just a moment about some of the
issues associated with the international charities and the
difficulties they are having. Some of them are difficulties
opening accounts and a good many others are having difficulties
with their remittances.
I have some intelligence before me that indicates that two-
thirds of the U.S.-based international NPOs, NPOs are non-
profit organizations, that they are reporting experiencing
difficulties with the banking system, such as refusal to open
accounts, 10 percent, and account closures, 6 percent.
Indicates also that 37 percent of U.S.-based international
NPOs reported delays in international wire transfers. Can
someone give me some intelligence on why this is occurring?
Dr. Orozco. Maybe I can. There has been a presumption of
risk in cross-border money transfers by the nature of the
transaction itself, but not by the fact that a cross-border
money transfer represents a financial risk.
Even prior to Chokepoint, the many money transfer operators
or money service businesses have suffered account closures at
differing instances. As their accounts are closed they face
more difficulty in providing services to customers.
But the pattern is that there is no correlation between
money transfers, remittances, family remittances, and financial
risk, whether it is from money laundering related to drug
trafficking or financial terrorist activities or even other
forms of money laundering. However, the practice, the
systematic practice has existed and has prevailed.
There are money transfer companies that sometimes are
currently operating only on two bank accounts, for example, to
send more than 200,000 transactions a month from customers
through other customers. And they do have a real challenge on
how to provide the services.
The main effect, in fact, is that it limits innovation.
Currently, the extent of competition is being set back in the
money transfer business because the regulatory environment is
not allowing them to innovate investor resources in innovation
because they have to put their money into complying to
different regulatory contexts and the pressure from banks to
keep their accounts open.
Mr. Green. Would someone else care to comment?
Mr. Oxman. Congressman, I think this is a terrible example
of how Operation Chokepoint harms the very people that we are
trying to help. Charitable giving is at the heart of who we are
as a people in this country.
We are lucky that great international charitable
organizations choose to set up business here in the United
States. But if we deny them access to the payment systems, and
the ability to send charitable dollars overseas, they are going
to leave the country.
Or, as we talked about earlier, they are going to find
other ways to operate that take them outside of our payment
systems and outside of the purview of regulators that are
ensuring that they are doing good by doing good.
I think you have highlighted something that is an untoward
and unfortunate consequence of Operation Chokepoint, the kind
of de-risking that we really need to prevent from happening in
order to allow charitable organizations and really all
legitimate operators in business in this country to access
financial services to be able to do good work and benefit our
economy.
Mr. Green. I had at least one constituent, and I will come
to you. I just want to make this comment if I may? One
constituent who believes that religious affiliation has
something to do with the reception you will receive when you
attempt to move into banking. Does anybody have a comment on
that as you are making your additional comments? Religious
affiliation? Yes, sir?
Mr. Schneider. I have not heard directly that expressed,
but that certainly would be troubling if that were becoming a
category of concern in and of itself, for someone to not
provide banking services on that basis.
I was just going to note, I think sometimes our one pathway
forward is data. How do we understand what is going on in this
industry? And there is a lot of conjecture, a lot of
supposition, but, we have data at the Conference of State Bank
Supervisors, our Money Service Business Call Report tracks
exactly how much money is being transmitted domestic to foreign
countries.
In fact, when filing is ended at the end of today we will
be able to tell you the country of destination for all of that
money. It doesn't in and of itself solve the problem that your
constituents are experiencing on a day-to-day basis, but it
provides a basis for being thoughtful about this rather than
just operating from conjecture and speculation.
Mr. Green. Mr. Chairman, would you allow one additional
question?
Chairman Luetkemeyer. Yes, sir.
Mr. Green. Thank you. Can someone give me an indication as
to how these limitations that are being imposed will impact the
cryptocurrency in terms of persons concluding that maybe there
is a better way to do this, an easier way to do it? If you
would, please?
Mr. Oxman. Yes, Congressman, that is certainly a question
for those who are de-risked and removed from access to
traditional financial services. Cryptocurrency is certainly an
option for them.
That is not necessarily a bad thing. There are some markets
for whom cryptocurrency is highly appropriate and there are
plenty of legitimate and legal uses for cryptocurrency out
there.
However, what I would suggest is that if the goal of
regulators and law enforcement is to be able to look out for
fraud and look out for bad actors, we are all better off if
they are in the traditional financial system and not de-risked
out of it.
Chairman Luetkemeyer. The gentleman's time has expired.
With that we go to another gentleman from Texas, Mr.
Williams, recognized for 5 minutes.
Mr. Williams. Thank you, Mr. Chairman. And I would like to
say risk management is a critical function for any business or
financial institution in this country. And assessing risk can
become even more challenging if financial regulators institute
practices that are unpredictable and carry compliance measures
that are costly or misguided.
The practice of de-risking has damaging effects on Main
Street America and causes financial institutions to terminate
long-lasting business relationships if they might be deemed
high risk.
Operation Chokepoint is one of the many examples of
Executive overreach from the previous Administration. And while
this Administration is taking deliberate action to curb efforts
like the Operation Chokepoint, we must remain vigilant for
similar efforts in the future.
And in full disclosure I am a car dealer and I have been on
the receiving end of Operation Chokepoint. I know what it does.
Mr. Secretary, I know you and I consider Mr. Cooper a dear
friend, so tell him hi. Thank you for being here. I would like
to ask a question to you.
I introduced, as you know, H.R. 3626, the Bank Service
Company Examination Coordination Act, and this bill will
enhance State and Federal regulators' ability to coordinate
examinations and share information on banks' technology vendors
in an effective and efficient manner.
My question would be can you explain how authorizing State
regulators to examine third-party technology service providers
is beneficial and how that could avoid duplicate examinations
and reduce regulatory burden?
Mr. Schneider. Yes, thank you very much, sir. I will give
Mr. Cooper your best the next time I see him, which will be in
a couple of weeks. Your bill, we applaud you for introducing
it. It is critically important to making the financial services
regulation system more efficient.
As I mentioned throughout one of my themes is we are out
there every day as State regulators doing this work, examining
these third party services providers, many of which are money
service businesses and new FinTech innovators.
And for us not to be able to communicate freely with our
Federal counterparts for them to know what we are doing and for
us to know what they are doing, just results in more
examinations, more work, more regulatory burden that seems
unnecessary because it is just duplicative at that point in
time.
The simple change that your bill, the simple, commonsense
change that your bill would provide could greatly impact a
reduction in regulatory burden.
Mr. Williams. OK. And I have another question for you, Mr.
Secretary. Your testimony references Vision 2020, a series of
initiatives to modernize State regulation on banks. I would ask
you, can you briefly describe this initiative and how it will
address re- or de-risking and what components of Vision 2020
might be applied to make Federal supervision even more
efficient?
Mr. Schneider. Well, one of our pillars is coordinating
better with our Federal counterparts. We are listening to our
non-bank FinTech companies that we regulate more closely
through an advisory panel that will tell us what their pressure
points are so we can better respond.
One of our pillars is to harmonize State laws as much as
possible so that FinTech innovators know the rules of the road,
know what to expect from a State regulator, know what to expect
from a State exam.
How we work together as State examiners is another focus of
our Vision 2020 initiative. And quite frankly, making sure that
the banking system is available to all of these new companies
is another pillar of our Vision 2020.
And to that extent, we have to start having honest
conversations with our bank, with the banks that we supervise.
Again, we touch 78 percent of every bank in America. Making
sure that they understand what they need to do, they have an
obligation to mitigate their risk. We have given them tools to
better understand that.
And to understand that at least from the perspective of
State regulators there are no taboo categories. You are
entitled to bank any lawful business that you want to bank.
Understand the risk of doing that, use the tools that we have
given you, and hopefully that is a pathway that the State
regulators can use to attack this de-risking phenomenon.
Mr. Williams. Thank you for that testimony. My last
question will be to you, Mr. Oxman. Operation Chokepoint may be
one of the most abusive Government overreaches in our Nation's
history. As a business owner myself for almost 50 years, it is
unconscionable that a Federal agency could so recklessly affect
the livelihoods of so many law-abiding citizens and businesses.
How do we prevent future overreach from the Executive
Branch? And should the roles of the agency and of Congress be
in that prevention?
Mr. Oxman. I think, Congressman, you are absolutely right
in characterizing this overreach as harmful to our economy. It
is harmful to American business. And our concern going forward
is we saw Operation Chokepoint come up during the prior
Administration, but as you noted, there is a risk going forward
next year, 5 years from now, 10 years from now, that agencies
will start this back up again.
I think the proper role of Congress is to pass legislation
like we have talked about today, H.R. 2706. Make sure Federal
agencies, Federal law enforcement understand that Operation
Chokepoint is not the law of the land and they are not to act
as policymakers.
It is Congress' decision which merchant activities are
legal and which aren't. And regulators and law enforcement
should not be using Operation Chokepoint as a policymaking
activity. It is wrong, and Congress needs to stop it.
Mr. Williams. Thank you for your testimony.
Chairman Luetkemeyer. The gentleman's time has expired.
With that, we go to the gentleman from Florida. Mr. Ross is
recognized for 5 minutes.
Mr. Ross. Thank you, Chairman, and I appreciate this
hearing. I think the Operation Chokepoint has to be one of the
most self-serving, corrupt abuses of power that this country
has ever exercised. And unfortunately the small businesses, the
mom-and-pops have been impacted by it. It sets a very bad
precedent.
Mr. Oxman, I am hopeful that we don't see it again and that
we do pass legislation to make sure it never happens again.
Mr. Baxter, your particular industry is unique. As the rest
of the world seems to want to go cashless, you supply a much-
needed basis, cash, to markets where it is hard to find cash.
You have your ATMs throughout rural areas.
Could you describe what has been your experience in dealing
with banks in areas where you have consumer bases that
desperately need your services?
Mr. Baxter. It is of recent, of the past year, it has not
been good at all, as--
Mr. Ross. You have had technological advances that you have
had to keep pace with, which you have been able to do. And yet
you serve a market need that nobody else will service.
Mr. Baxter. Correct.
Mr. Ross. And for some reason you have banks that now won't
allow you, a legitimate ATM provider, to be able to have bank
accounts. It--what--why?
Mr. Baxter. I wish I could answer the why because we have
received the letters and we have asked why, but we have
received no response. What it has done to us is this. It has
forced us to go to other alternative banks, which has created
greater risk, a greater risk for us.
And here is the greater risk. The greater risk is what used
to be, for example, with Wells Fargo, as one example. Many
branches throughout the country, even some closer to some of
the rural areas that we service, so rather than having to go
pick up 2-days' worth of cash and haul it around in a vehicle
and the danger in doing that--
Mr. Ross. Right.
Mr. Baxter. --we could pick up a half-a-day's worth of cash
and then go to another branch and pick up another half-day's
worth of cash to get that cash out but yet keep ourselves safe
and everyone else around us safe.
Those are the problems that we now face. We are now having
to pick up cash in larger amounts and carry larger amounts.
Mr. Ross. And they are all hiding. I guess they are hiding
their reasons. The regulators are hiding their reasons on the
basis of anti-money laundering statutes. Now, you have been in
this business for quite some time.
Mr. Baxter. Yes, sir.
Mr. Ross. You have made a career off of it. You have
employed a lot of people off of it, and more importantly you
have catered to a market that desperately needs your services
out there that most banks and other financial institutions just
won't service for cost purposes alone.
Are you aware of any instances of violations of the anti-
money laundering laws dealing with the independent ATM owners?
Mr. Baxter. I absolutely am not.
Mr. Ross. And so that excuse in and of itself it just
doesn't shed light. What else could it be? Do you have
protocols in place to make sure that you don't have money
laundering operations going on?
Mr. Baxter. Correct.
Mr. Ross. And have you shared these with bank regulators?
Mr. Baxter. We have not had the opportunity.
Mr. Ross. Because they won't allow it, will they?
Mr. Baxter. That is exactly why the National ATM Council
would like to ask the OCC and banks and regulators to join with
us in a group conversation. Let us share with you what we do
and you share with us what are your concerns.
Our books are open. You can examine us and we are auditable
from top to bottom.
Mr. Ross. Yes, clearly. But more importantly, you are more
than willing to work with the regulators to make sure that you
are not only in compliance with the laws, but that you also
have access to bank services so that your consumers, your
customers that desperately need your services, can do so at an
affordable price and an accessible opportunity.
Mr. Baxter. Correct.
Mr. Ross. Mr. Schneider, I am one of the strongest
proponents of State regulations. I am a strong proponent of our
insurance regulation system and of course our State banking
system.
You have developed a tool called the Bank Secrecy Act Self-
Assessment Tool for money services businesses. Can you describe
real briefly how it is helping with de-risking?
Mr. Schneider. Well, our thought is that--and again, it is
a tool not just a rule.
Mr. Ross. Right.
Mr. Schneider. It is a tool that banks and non-banks can
use to understand their own individual BSA/AML risk. And once
you understand your own risk profile then you can take the
appropriate steps to mitigate it. And that is how we think
businesses should handle their risk--
Mr. Ross. And I think you--
Mr. Schneider. --and not rely on broad categories.
Mr. Ross. Our Federal regulators aren't subscribing to that
particular model, are they?
Mr. Schneider. This is something that we take pride in
developing at the State level. And hopefully our Federal
regulators will recognize it for its value.
Mr. Ross. And have a chance to replicate it?
Mr. Schneider. Yes.
Mr. Ross. Thank you.
I yield back.
Chairman Luetkemeyer. The gentleman yields back.
Now we go to the gentleman from Colorado, Mr. Tipton. He is
recognized for 5 minutes.
Mr. Tipton. Thank you, Mr. Chairman. Thank the panel for
taking the time to be able to be here. We have had some
conversation in terms of access actually to banking, access to
capital issues.
And Mr. Oxman, I come from a rural part of Colorado, the
area that I represent. And a number of our folks now are
starting to participate in the electronic payments industry and
rural people. They have sometimes been seen as underserved and
because of the physical distance basically, that they have from
a natural brick-and-mortar institution.
Can you briefly touch upon how de-risking will threaten
access to choices for rural customers and whether or not de-
risking has been detrimental to their financial opportunities?
Mr. Oxman. Thank you, Congressman. It is an exciting time
in our industry, and FinTech products and services are really
opening up access opportunities for those, particularly in
rural areas like Colorado.
These are people, as you noted, who don't necessarily have
access to a bank branch. They don't necessarily have access to
as many retail options as they might like, but they all have
smartphones. And they can use those devices which are safe,
secure, and reliable and other FinTech products and services to
access electronic payment systems.
E-commerce is a great opportunity for them, for example. It
doesn't matter if you are in a rural area or in an urban area.
With e-commerce you can reach the whole world and sell your
products and services that way.
And those are the type of FinTech innovations that ETA
members are deploying every day. And the problem with de-
risking is it says regulators are going to be paying close
attention to FinTech products and services.
You might want to consider not deploying them or not
offering them because, well, maybe Operation Chokepoint-type
regulatory environment prevents that type of innovation from
happening. That is what we don't want to see.
What we want to see is these new FinTech products and
services bringing more merchants, bringing more consumers onto
electronic payments rather than fewer. And that creates exactly
the kind of opportunity that you are talking about, and that is
what is most exciting about the opportunity of FinTech and
regulation law enforcement activities like Operation Chokepoint
prevent that from happening.
Mr. Tipton. Great, thank you. I appreciate that.
Mr. Schneider, I want to be able to visit with you a little
bit and follow up on some of the comments that you had made in
your testimony. About what happens to the demand for money
service businesses if these businesses are denied access to
capital and the banking services.
Where do these customers actually turn to if they are
denied that access to the financial system because of the
effects of de-risking?
Mr. Schneider. I think that is one that has been touched on
before. It is one of the ironies. We will lose visibility into
where they are going because they are going to be going into
this pure, unregulated cash system where we have no oversight
into what they are doing.
In some cases, of course, they are going to be deprived of
any service because everyone has been run out of the
communities in which they are living. And we just view that as
the worst possible outcome, particularly if it is the product
of non-thoughtful risk mitigation strategies.
If it is just you think you can't bank these customers
because they are inherently risky, we are going to lose track
of what they are doing, and in many cases they just won't be
served.
Mr. Tipton. That is an interesting paradox, isn't it, that
we are saying we want to be able to have the regulatory ability
to be able to track dollars, to be able to make sure that
things are safe. But at the same time we are driving people
into those gray market areas. What is the safety level of the
people who do move into that?
Mr. Schneider. Yes, that is a great risk. Again, when you
are moving vast quantities of cash around just the physical
safety of the people that are doing that and the customers that
are receiving that service is of great concern to us as State
regulators.
Mr. Tipton. If you have some ideas maybe you would like to
be able to share them, what further things can Congress do to
be able to address de-risking?
Mr. Schneider. Well, I do think again, getting the
attention of our Federal counterparts that they need to be more
individual. They need to make sure that institutions evaluate
their risk, their reputation risk, their BSA/AML risk. That
they pay close attention to individual risk and not these broad
categories of risk.
And that, quite frankly, they learn to better understand
what us as State regulators are doing with respect to making
sure these businesses, these non-depository institutions are
meeting their BSA/AML obligations. And perhaps that can give
them some comfort to not be quite so reactionary to certain
types of business categories.
Mr. Tipton. Great, and appreciate your--did anyone else
want to weigh on that?
Dr. Orozco. I think to answer your question, they need to
tell Mr. Baxter why they are closing his account, not just give
you an 800 number and leave it there.
The problem is that there is no transparency and
accountability in the process. And as long as you don't have
that process in place, simply giving the right rebuttal to a
money service business to provide evidence that they are doing
actually right, they are actually preventing risk, the problem
will continue.
And there is a serious problem. There are consequences
happening across not just in the United States but it is a
global pattern where businesses are actually suffering
dramatically and people are being affected by it.
Mr. Tipton. Right. And unfortunately part of the problem
has been caused by the regulators. With that, Mr. Chairman, I
yield back.
Chairman Luetkemeyer. The gentleman yields back.
With that, we go to the gentleman from Kentucky, Mr. Barr,
recognized for 5 minutes.
Mr. Barr. Well, thank you, Mr. Chairman. And first and
foremost, let me just applaud you and commend you for your
consistent focus and attention to the issue of de-risking and
Operation Chokepoint. As long as I have been on this committee
you have been laser-focused on addressing this problem.
And it is a problem and it affects Kentucky. Legitimate
businesses losing access to financial services and banking
services and that is a real problem.
I would like to start with Mr. Schneider. I appreciate your
commonsense, measured, thoughtful approach to this issue. We
have a regulator in Kentucky, Charles Vice, Commissioner Vice,
who has a similar thoughtful approach to this issue.
And for both of you and other State regulators, my question
is, how effectively are you coordinating or not coordinating,
as the case may be, with Federal regulators? How significant is
the gap in the approach to this issue?
Mr. Schneider. Well, thank you very much. I will also see
Mr. Vice in a couple of weeks, so I will give him your best. I
think we as State regulators are doing an increasingly better
job of working together. For the big MSBs last year alone we
did 63 joint exams. That is reducing the regulatory burden for
them.
The more we as States work together and come in and do
something once as opposed to doing it 50 times, the less
burdensome it is for the companies that we regulate.
Generally speaking we do have good relationships. We work
as cooperatively as we can with our Federal partners. But there
are some gaps.
And again, I don't mean to keep harping on H.R. 3626, but
that small change that would allow us on these new types of
innovative companies to be able to share exam findings,
participate in joint exams with Federal regulators, as
seemingly simple as that is, would not only reduce regulatory
burden, but I think make our Federal counterparts more aware of
what we are doing so that they don't have to think they need to
do it again because they don't know what we are doing in the
first place.
Mr. Barr. Well, speaking of these innovative companies and
FinTech from a regulator's point of view and also Mr. Oxman
from your industry's point of view, can you all give us some
concrete examples of some FinTech companies, some innovative
entrepreneurial companies that are helping combat fraud?
And without identifying particular companies just what are
some of the ways in which FinTech companies are helping combat
fraud or money laundering or other kinds of nefarious
activities?
Mr. Schneider. Well, I can just start by saying as part of
the licensing process for our money service business companies,
having a good BSA/AML compliance plan is required. That is a
required checkpoint to even get licensed by one of our States.
We see them being very thoughtful. They don't just approach
this--I don't think any of them necessarily contend they have a
magic bullet or a secret sauce. It is just a good understanding
of the regulations, working with their State regulator to make
sure we agree that their plan works and then going forward and
providing services.
Mr. Oxman. And I think in the FinTech space, Congressman,
one of the most interesting areas is this so-called peer-to-
peer services where consumers are sending money back and forth
to each other electronically.
Some of the biggest names in technology are deploying peer-
to-peer services. And they are deploying them with those built-
in BSA/AML-type protections that you as the committee of
jurisdiction want to see them deploying.
They are new-fangled services. They use smartphones instead
of the checks that we used to write to each other. But they are
offering those protections.
And as we have been talking about today, we should look for
more opportunities to bring consumers, bring merchants onto
these electronic payment systems because it is a lot easier to
provide those fraud protections in the electronic world than it
is in the offline world.
Mr. Barr. And for regulators that don't have this open mind
about innovation and get a little bit overzealous with respect
to de-risking, there is an opportunity to actually undermine
the safety of the financial system. Is that fair to say?
Mr. Oxman. That is absolutely true. That is the worst part
of Operation Chokepoint is it has that perverse effect of
kicking people off of the very systems that are deploying these
kind of fraud prevention tools and preventing that fraud
analysis from taking place.
We are seeing some good signs, for example, the OCC has
this FinTech charter idea that we support that will help,
again, bring these new FinTech players onto the financial
system so we can deploy these fraud algorithms and prevent
fraud from taking place.
Illinois and seven other State commissions have joined
together on a joint effort to streamline the money transmitter
evaluation process for licensing. That is a great move by some
very forward-thinking regulators, again, designed to help bring
these FinTech companies into the financial system onto
electronic payment systems so we can prevent the kind of fraud
that we want.
Mr. Schneider. Sir, there is a lot of talk about the
FinTech charter I know, and probably subject of many more
hearings, separate hearings. The only thing I would like to
caution there is, help people keep in mind, is creating another
big Federal bureaucracy as a chartering authority the direction
we want to go here?
States are already doing this work. We have a proven track
record of keeping consumers safe, proven track record of
supporting innovation. And I am not sure it makes a lot of
sense to create a new Federal bureaucracy which could cause the
problems that the current one seems to have created.
Mr. Barr. Thank you. My time has expired.
Chairman Luetkemeyer. The gentleman's time has expired and
we are out of witnesses. But I do have a couple of follow-up
comments and questions here for the record.
In a question Mr. Rothfus indicated that pawnbrokers were
included on the FDIC high-risk list. Let the hearing record
reflect that the pawnbrokers were not included on that list.
With regards to a comment Mr. Ellison made, I would like to
clarify that he said something to the effect that he didn't see
any coordination or any personal inclinations of the DOJ and
FDIC folks with regards to Operation Chokepoint.
And I would just point out that there are oversight
committee reports on both the FDIC and DOJ showing personal
motives with documented emails between the individuals in those
agencies that there were personal motives and there were
personal actions taken as a result of that.
Mr. Oxman, I really enjoyed your one comment where you
said, ``The risk is based on the industry or business and not
the products sold.'' I thought that was spot on, and I
appreciate that.
I am going to use that. I am going to swipe that from you
to use in front of some of my other discussions sometimes. Mr.
Barr hit on a little bit of it here and I wanted to follow up a
little bit.
And you made the comment a minute ago that there are the
FinTech folks and the EFT folks, electronic transfer folks, are
working on different products and better ways to protect
information and money transfers.
These technologies are going to have--they are going to be
implemented, and they are going to ask the retailers to
participate, whether it is biometrics or whatever else is out
there, so whenever a credit card, debit card, or whatever type
of payment is used.
And in order to do this they are going to have to change
the way they do business as well. Is that right?
Mr. Oxman. That is absolutely right, Mr. Chairman.
Chairman Luetkemeyer. My question I guess is because we had
another hearing yesterday with regards to the liability
situation with regards to how this is all taking place between
the retailers, third parties, banks, what have you.
And seems to fit right in there with regards to as you
technologically continue to advance and these things are
basically forced onto the businesses, they are going to have to
change the way they do business as well. Is that correct?
Mr. Oxman. That is absolutely right, Mr. Chairman, and it
does go back to that principle that our industry is in the
first instance under both Federal law and card network rules.
We are responsible financially for fraud.
Consumers have a 100 percent liability protection against
fraudulent activity on their credit cards. We have a powerful
incentive to deploy exactly the type of new technology tools
that you are talking about, whether it is biometrics like the
fingerprint or face ID. We are moving away from old types of
validation, authentication like the signature, which we are
getting out of the system.
These new technology tools are exactly what the private
sector should be deploying. We want to deploy them and we are
well-positioned to protect against fraud with them.
Chairman Luetkemeyer. Mr. Schneider, you made a couple of
great comments with regards to the environment and how it needs
to be changed. You, as someone who is a head of a regulatory
agency I entered this discussion, quite frankly, with the top
regulators. And I have told them they have a culture within
their agency that has to be changed.
Here we have Operation Chokepoint that has been discussed,
and it has morphed into something more than just the list of
what was on the FDIC.
Now, it takes into account ATM machines, electronic
transfer folks, and it is ironic because here we are talking
about shutting down systems that provide cash, the ability of
people to get cash from their accounts, as well as being able
to transfer money electronically out of their accounts, now how
are they supposed to access their accounts?
How are they supposed to access their accounts if they
can't get cash or they can't get their money transferred? What
is left? I am at a loss.
Mr. Schneider. I think that just highlights this great
irony that an overzealous regulation can actually have the
exact opposite effect as pushing people into areas where we
have no visibility into what they are doing and less
compliance.
Chairman Luetkemeyer. How do you change the culture at the
agency? We have a bill to stop Operation Chokepoint. We have
had hearings here to try and expose this. We are trying to work
with the different regulators.
And I don't want to put words in your mouth here, but it
would seem to me they wouldn't need to just continue to have
meetings with not only ourselves but with your groups with the
regulators and say, hey look, we have to coordinate. This is
still going on. They are still at the bottom.
And quite frankly, I have actually told some regulators, I
said this culture is all the way down to the bottom and you are
going to have to go all the way down to the bottom to reach
this.
Mr. Schneider. Oh, I absolutely think so. We certainly
learn a lot from our Federal counterparts on certain issues. I
think they have a lot that they could learn from us. And the
more we collaborate and the more we cooperate is a way that is
starting to change that culture.
Chairman Luetkemeyer. Well, actually we are at the end of
our hearing here and we have a couple of minutes because I know
we are going back into session here shortly. But I would be
willing to let each one of you have a couple minutes just to
close if you would like to answer a question that didn't get
enough time to or just make it brief. We don't want 5 minutes.
Mr. Schneider. Oh yes, absolutely. I would just like to
thank the committee for listening to us, for getting a better
understanding of what State regulators do, the information that
we are providing on this topic through our call report, the
degree to which we are trying to make regulation more efficient
and more effective.
I appreciate you listening to us, and for helping us where
the law needs to be changed a little bit to work better with
our Federal counterparts.
Chairman Luetkemeyer. Mr. Baxter, you have a couple
comments?
Mr. Baxter. I would like to thank the committee for holding
these hearings today and for giving us an opportunity to
express what it is that the National ATM Council and the ATM
industry private sector as a whole would like to move forward
with in regards to working with the OCC, the regulators and
anyone else that the Government thinks is necessary for our
industry to be able to survive, thrive, and move forward
supplying cash to America.
Chairman Luetkemeyer. Very good.
Mr. Oxman, any final comments?
Mr. Oxman. Thank you, Mr. Chairman, and thank you for the
opportunity on behalf of the Electronic Transactions
Association to be here today. Our members are actively
deploying FinTech products and services to prevent fraud and
more importantly to enable commerce in this country, to enable
merchants and consumers to continue to drive our economy with
retail purchases.
And we appreciate the opportunity to explore how a
regulatory environment can be better conducive to the
deployment of the type of FinTech products and services that
prevent fraud and enable commerce in this country. Thank you.
Chairman Luetkemeyer. Dr. Orozco?
Dr. Orozco. Thank you very much, too. I think the main
issue is to redirect the attention from de-risking into risk
prevention. And the instruments exist to do that. And in that
line, there are differing methods to continue enforcing the law
without sacrificing financial access for businesses or
individuals. Thank you.
Chairman Luetkemeyer. Well, I would like to thank the
witnesses for your testimony today. You have been great, a lot
of great comments and appreciate your frankness.
Without objection, all members will have 5 legislative days
within which to submit additional written question for the
witnesses to the Chair, which will be forwarded to the witness
for their response. I ask each witness to please promptly
respond if you are able.
Without objection, all members will have 5 legislative days
within which to submit extraneous materials to the Chair for
inclusion in the record.
With that, this hearing is adjourned.
[Whereupon, at 11:24 a.m., the subcommittee was adjourned.]
A P P E N D I X
February 15, 2018
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